McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Global Business and Accounting Chapter 15

15-2 Globalization Occurs as managers become aware of and engage in cross-border trade and operations. A high level of globalization is a multinational enterprise that begins with raw material extraction and ends with final product assembly and sales in multiple foreign locations.

15-3 Globalization

15-4 Globalization Globalization typically progresses through a series of stages that include: 1.Exporting 2.International licensing 3.International joint ventures 4.Wholly owned international subsidiaries 5.Global sourcing. 1.Exporting 2.International licensing 3.International joint ventures 4.Wholly owned international subsidiaries 5.Global sourcing.

15-5 Environmental Forces Shaping Globalization Globalization Political and legal system Economic system Culture Technology and infrastructure

15-6 Political and Legal Systems Threat of government control or seizure of assets. Differing taxes, tariffs and licensing fees. Restrictions on foreign ownership percentage. Restrictions on currency flows. Trade agreements specifying raw material sources and labor content. Duty-free foreign trade zones. Tax incentives encouraging or discouraging share ownership. Policies affecting individual savings. Policies impacting educational level of citizens.

15-7 Economic Systems Planned Economy Government owns factors of production Market Economy People owns factors of production

15-8 Culture

15-9 Technology and Infrastructure Difficulty transferring knowledge and information Differences in educational and training levels Differences in internal accounting systems Poor access to communication equipment Unreliable utilities Inadequate transportation systems Lack of specialized equipment

15-10 Harmonization of Financial Reporting Standards The International Accounting Standards Board (IASB) has as one of its stated goals the harmonization of accounting standards. Harmonization is used to describe the standardization of accounting methods and principles used in different countries throughout the world.

15-11 Harmonization of Financial Reporting Standards

15-12 International Financial Reporting Standards and Budgeting Two approaches to implementing international financial accounting standards AdoptionConvergence Europe 2005 Canada 2011 Chili 2009 Hong Kong 2005 China 2007 Australia 2007

15-13 Foreign Currencies and Exchange Rates An exchange rate is the amount it costs to purchase one unit of currency with another currency. ¥1,000,000 × $ = $7,640

15-14 Accounting for Transactions with Foreign Companies On 1 January 2009, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on that date. On 1 January 2009, the exchange rate is $0.97 per Euro. U.S. company purchases €100,000 from financial institution. Cash Purchase ― Prices Stated in a Foreign Currency

15-15 Accounting for Transactions with Foreign Companies On 1 January 2009, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on 15 February On 1 January 2009, the exchange rate is $0.97 per Euro. At 31/1/09 the spot exchange rate is €1 = $0.96. On 15/2/09, the exchange rate is €1 = $0.98. Credit Purchase ― Prices Stated in a Foreign Currency

15-16 Accounting for Transactions with Foreign Companies On 1 January 2009, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on February 15, On 1 January 2009, the exchange rate is $0.97 per Euro. At 31/1/09 the spot exchange rate is €1 = $0.96. On 15/2/09, the exchange rate is €1 = $0.98. Credit Purchase ― Prices Stated in a Foreign Currency

15-17 Accounting for Transactions with Foreign Companies On 1 January 2009, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on 15 February On 1 January 2009, the exchange rate is $0.97 per Euro. At 31/1/09 the spot exchange rate is €1 = $0.96. On 15/2/09, the exchange rate is €1 = $0.98. Credit Purchase ― Prices Stated in a Foreign Currency

15-18 Accounting for Transactions with Foreign Companies On 1 January 2009, a U.S. company sells equipment to an Italian company for €100,000. The amount is collected in full on that date. On 1 January 2009, the exchange rate is $0.97 per Euro. Cash Sale ― Prices Stated in a Foreign Currency

15-19 Accounting for Transactions with Foreign Companies On 1 January 2009, a U.S. company sells equipment to an Italian company for €100,000. The full amount will be collected on 15 February On 1 January 2009, the exchange rate is $0.97 per Euro. At 31/1/09 the spot exchange rate is €1 = $0.96. On 15/2/09, the exchange rate is €1 = $0.98. Credit Sale ― Prices Stated in a Foreign Currency

15-20 Accounting for Transactions with Foreign Companies Credit Sale ― Prices Stated in a Foreign Currency On 1 January 2009, a U.S. company sells equipment to an Italian company for €100,000. The full amount will be collected on 15 February On 1 January 2009, the exchange rate is $0.97 per Euro. At 31/1/09 the spot exchange rate is €1 = $0.96. On 15/2/09, the exchange rate is €1 = $0.98.

15-21 Accounting for Transactions with Foreign Companies Credit Sale ― Prices Stated in a Foreign Currency On 1 January 2009, a U.S. company sells equipment to an Italian company for €100,000. The full amount will be collected on 15 February On 1 January 2009, the exchange rate is $0.97 per Euro. At 31/1/09 the spot exchange rate is €1 = $0.96. On 15/2/09, the exchange rate is €1 = $0.98.

15-22 Hedging Fair Value Hedge Any gain or loss is recognized currently in earnings. If the hedge is on available-for-sale securities, any gain or loss is reported in other comprehensive income on the equity section of the balance sheet. Future contracts are the right to receive a specified quantity of foreign currency at a future date.

15-23 Translation of Foreign Currency Financial Statements This is the first year of operations for a 100% owned Mexican subsidiary of the U.S. enterprise, Matrix, Inc.

15-24 Translation of Foreign Currency Financial Statements

15-25 Translation of Foreign Currency Financial Statements If dividends are paid, the translation is based on the historical rate when the dividend is paid. The translated ending retained earnings carries forward to the next accounting period.

15-26 Translation of Foreign Currency Financial Statements The translation adjustment is reported in other comprehensive income in the equity section of the balance sheet

15-27 Global Sourcing Differences in exchange rates in many different countries can create significant complexities for firms practicing global sourcing. Many companies underestimate the cost of globalizing their business operations because they are not familiar with the environmental characteristics previously discussed. Differences in exchange rates in many different countries can create significant complexities for firms practicing global sourcing. Many companies underestimate the cost of globalizing their business operations because they are not familiar with the environmental characteristics previously discussed. €¥£ Customs duties Import fees Multicountry tax laws Tax treaties

15-28 End of Chapter 15